M2 directors slip through loophole

Disquiet as court allows consultancy. Linda Harrison reports.

The channel industry is no stranger to people who believe they can live above the law and directors with chequered pasts focusing on an overriding desire to make huge amounts of money. Many of these are able to slip in and out of legal loopholes unnoticed.

So it could be seen as a positive development when last month, two former channel directors were banned from continuing to operate companies.

There should have been applause all round, but disquiet within the channel has been growing steadily as the disqualifications details emerge.

Michael Brown and Donald Ballan were stripped of their directorships and penalised for eight and six years respectively on 16 July at the Royal Courts of Justice in London.

Brown was a former director of Diamond Computer Systems, the failed PC retail chain, which went into liquidation owing about #3 million in November 1993. Ballan was a director of Diamond's main creditor, Direction Technology.

The two later became directors at Denmead-based reseller M2, while also being involved with a string of other companies, including Ricewood and Marstom.

Brown and Ballan's interwoven business dealings were so complex that one channel source described the way one of the two would resign a directorship, only to be succeeded by the other as 'a Dallas-style drama'.

Disbelief at the pair's tag team act began to mount when distributors and former creditors discovered Brown and Ballan would be allowed by the Royal Courts of Justice to spend consultancy time with their companies.

Shock quickly turned into contempt as channel players began questioning the decision to permit them to give advice to M2.

As one reseller pointed out: 'Even if they are disqualified up front, they are still shadow directors.'

Roy Tucker, managing director of M2, confirmed Brown and Ballan would be allowed access to the building to give business advice to employees.

But he said they would not be allowed to make decisions without the consent of the board.

Surprisingly, some distributors said they would maintain a relationship with M2, but one industry source refused the company credit terms on the grounds of Brown and Ballan's history, insisting on cheque on delivery.

Other companies, such as Micro Peripherals, refused point blank to deal with M2. The broadline distributor declined to do business with the reseller 'on principle' after losing about #80,000 as a result of dealing with Diamond.

George McDowell, managing director of Micro Peripherals, was initially pleased at the disqualifications: 'This action was long overdue - the whole Diamond episode stank.' But he described the subsequent scenario as a 'farce', saying that allowing weekly consultation time made the penalty too weak.

However, McDowell acknowledged that 'the law has worked within the restrictions it has'. That consultation time was allowed at all surely calls into question whether the law should be tightened.

Another facet of Brown and Ballan's lives become entwined through the involvement of the two men's wives. Joanna Brown and Julie Ballan are still listed as directors of M2 in documents filed at Companies House.

Furthermore, Joanna Brown was also a director of Diamond at the time of its collapse, and of Direction Technology (SRY), also based in Denmead.

Julie Ballan was linked with Direction Technology as director and secretary.

One source wondered how the DTI can prevent Brown and Ballan from extending the consultation period. Will this mean giving business advice to their wives over breakfast?

Tucker revealed that Joanna Brown had handed the managing director position at M2 to him in June and is still a director. But he said Mrs Brown would stay in the background. Julie Ballan, PC Dealer was informed, will continue as personnel director.

Tucker vehemently defended his colleagues, stating: 'I don't agree with the disqualifications. The business is reliant on Brown and Ballan's knowledge and expertise. No one could replace them.'

Computer 2000 said the disqualifications would not change the way it does business with M2. Nick Tiltman, credit control manager at the distributor, pointed out that it didn't lose any money over Diamond. But he admitted he was aware of the history between the resellers.

'We're not going to do anything drastic, like pulling out our credit as a result of the disqualifications,' Tiltman said.

However, he conceded it was a worrying situation, admitting: 'We did re-assess the company immediately after hearing about the disqualifications.'

Eddy Pacey, Ideal Hardware's credit manager, believed the judgment would cause M2's business partners to look twice at their relationships. He said: 'It will certainly bring the connection between M2 and Diamond to people's attention, but will only affect the evaluation of the account for credit.'

Tucker denied there would be ramifications for M2, saying: 'If we had a bad track record, there might be a problem. But every distributor has been notified of the disqualifications and none have pulled out.'

Surely the industry must feel it cannot afford to ignore the connections disqualified directors have with other companies, but the channel needs to keep the situation in perspective.

Many credit control managers were watching Brown and Ballan and were aware of their business dealings. Last month's court ruling was expected by the channel, and though companies like M2 will not be unfairly penalised, they are most certainly being watched.

As Tiltman remarked: 'The industry is fairly cautious - no credit manager wants to get caught out twice.'